Business Overview
Barnwell Industries, Inc. (NYSE:BRN) is a diversified company engaged in the acquisition, development, production, and sale of oil and natural gas in Canada and the United States, as well as land investment and contract drilling operations in Hawaii. Despite facing headwinds in its core oil and gas segment, the company has demonstrated resilience through its diversified business model and strategic initiatives.
Barnwell operates through three primary segments: Oil and Natural Gas, Land Investment, and Contract Drilling. The Oil and Natural Gas segment is the company's largest, accounting for the majority of its revenues and operating profits. Barnwell's oil and gas operations are primarily located in Canada, with additional non-operated investments in Oklahoma and Texas. The Land Investment segment focuses on real estate development and sales in Hawaii, while the Contract Drilling segment provides water well drilling and pump installation services in the same state.
Financials
For the fiscal year ended September 30, 2023, Barnwell reported annual revenue of $25,269,000, a net loss of $961,000, and annual operating cash flow of $1,943,000. The company's free cash flow for the year was a negative $9,689,000, reflecting significant capital expenditures in the Oil and Natural Gas segment.
Quarterly Results
In the most recent quarter ended March 31, 2024, Barnwell reported revenue of $5,774,000, a net loss of $1,772,000, and operating cash flow of $2,262,000. The company's free cash flow for the quarter was a negative $1,186,000, primarily due to continued investment in oil and gas properties.
Oil and Natural Gas Segment
Barnwell's Oil and Natural Gas segment generated revenue of $9,274,000 and an operating loss of $324,000 (before general and administrative expenses) for the six months ended March 31, 2024. This represents a decrease in operating results of $3,011,000 compared to the same period in the prior year, primarily due to a non-cash ceiling test impairment of $1,677,000 and higher depletion expenses.
The company's oil and gas operations in Canada experienced a 47% decrease in the average price per unit of natural gas, a 7% decrease in the average price per unit of oil, and a 26% decrease in the average price per unit of natural gas liquids during the six-month period ended March 31, 2024, compared to the same period in the prior year. However, the company's production volumes increased, with a 35% increase in natural gas, a 19% increase in oil, and an 89% increase in natural gas liquids.
Barnwell has taken steps to mitigate the impact of commodity price volatility by entering into fixed-price contracts for a portion of its Canadian natural gas and oil production. In the quarter ended December 2023, the company amended certain of its Canadian purchase and sales contracts to fix the sales price on 34% of its natural gas production and 37% of its oil production for the period from April 1, 2024 to June 30, 2024.
Land Investment Segment
Barnwell's Land Investment segment generated revenue of $500,000 and operating profit of $500,000 (before non-controlling interests' share of such profits) for the six months ended March 31, 2024, compared to revenue of $265,000 and operating profit of $265,000 for the same period in the prior year. The increase was due to the sale of the last two single-family lots within Increment I of the Kaupulehu development in Hawaii during the current year period, compared to the sale of one lot in the prior year period.
The company's indirect non-controlling ownership interests in the Kukio Resort Land Development Partnerships, which own real estate and development rights in the Kukio Resort community in Hawaii, continue to be a source of income through the sale of residential parcels and commissions on real estate sales. During the six months ended March 31, 2024, Barnwell received $1,071,000 in cash distributions from these partnerships, resulting in a net amount of $953,000 after distributing $118,000 to non-controlling interests.
Contract Drilling Segment
Barnwell's Contract Drilling segment generated revenue of $2,063,000 and an operating loss of $595,000 (before general and administrative expenses) for the six months ended March 31, 2024, compared to revenue of $3,449,000 and operating profit of $105,000 for the same period in the prior year. The decrease in operating results was due to an increase in estimated costs resulting from labor cost increases and operational issues encountered on certain jobs.
In December 2023, the company entered into a stock purchase agreement to sell its wholly-owned subsidiary, Water Resources International, Inc., which operates the Contract Drilling segment, for $2,000,000. However, the buyer terminated the agreement prior to closing. Barnwell continues to explore strategic options for the Contract Drilling segment, including a potential sale of the business or its operating assets.
Liquidity
As of March 31, 2024, Barnwell had $3,332,000 in working capital. The company's primary sources of liquidity are cash on hand and cash flow generated by its oil and gas operations, as minimal cash flow is expected from the Land Investment segment going forward.
Management estimates that cash flows from the potential sale of the Contract Drilling segment, along with sufficient operating cash inflows from the Oil and Natural Gas segment, will provide the necessary liquidity for the company to continue as a going concern for the next twelve months. However, the company's long-term liquidity will depend on factors such as oil and gas prices, production levels, and the ability to fund necessary capital expenditures.
Risks and Challenges
Barnwell faces several risks and challenges in its operations, including:
1. Volatility in oil and gas prices: The company's Oil and Natural Gas segment is heavily dependent on the fluctuations in commodity prices, which can significantly impact its financial performance.
2. Regulatory and environmental risks: Barnwell's oil and gas operations are subject to various governmental regulations and environmental laws, which could result in increased costs or operational disruptions.
3. Decline in oil and gas reserves: The company's ability to maintain and grow its oil and gas production is dependent on its ability to replace depleted reserves, which can be challenging and capital-intensive.
4. Uncertainty in the Land Investment segment: The development and sale of land in Hawaii is subject to various market and regulatory factors, which can affect the timing and amount of future cash flows from this segment.
5. Competitive pressures in the Contract Drilling segment: The water well drilling and pump installation services industry in Hawaii is highly competitive, which can impact the segment's profitability.
Outlook
Barnwell has not provided any specific financial guidance for the upcoming fiscal year. However, the company's management has stated that it is focused on optimizing its oil and gas operations, exploring strategic alternatives for the Contract Drilling segment, and seeking opportunities to enhance shareholder value.
Conclusion
Barnwell Industries, Inc. is navigating a challenging environment in its core Oil and Natural Gas segment, marked by volatile commodity prices and operational issues. However, the company's diversified business model, with contributions from its Land Investment and Contract Drilling segments, has helped to mitigate the impact of these headwinds. Going forward, Barnwell's ability to manage its liquidity, optimize its oil and gas operations, and explore strategic alternatives for its Contract Drilling segment will be crucial in determining the company's long-term success.